Former CEO Charged with $185 Million Insider Trading Scheme

From the White Collar Crime Professor Blog, "The former CEO of military armor supplier DHB Industries, now known as Point Blank Solutions, was arrested on a superseding indictment (available below) that charges him with insider trading involving proceeds of over $185 million from the sale of company stock in 2004."

Rumors Persist of O'Neal Ouster

You say one little thing - "let's merge with a bank!" - and the Board wants your head. The press is full of rumors this afternoon of the outster of Stan O'Neal as the head of Merrill Lynch.

Head of Retail Robert McCann is a possible successor, as well as Blackrock head Larry Fink and NYSE head John Thain.

The rumors started this morning when it was reported that O'Neal admitted he had misjudged the company's exposure to subprime mortgages. After all, the write offs were only eight billion dollars. Then he proposed a merger with a bank - turns out, it wasn't just a "bank" it was Wachovia. Can you imagine that, Merrill and Wachovia?

Apparently the Merrill Board couldn't imagine it either.

The fact that Merrill's employees are on track to be the worst paid on Wall Street isn't helping him any.

We will see if he survives the weekend.

Merrill’s Chief Is Said to Consider a Bid to Merge - New York Times

Lose a couple of billion dollars and panic sets in. O'Neal is floating the idea of merging Mother Merrill with a bank.

Apparently, that went over like a lead balloon.

Opponents of Predispute Arbitration Agreements Seek Neither Fairness Nor Equality; Rather, They Seek An Unfair Strategic Advantage.

The headline comes from a well researched and well reasoned white paper on securities arbitration, produced by the Compliance and Legal Division of SIFMA, the brokerage industry's trade association.

While I would not have said it so bluntly, the comment hits the nail on the head. For years the claimant's bar and other "pro-consumer" organizations have been attempting to alter securities arbitration to the advantage of the customer, and by some measures, have been successful.

At the same time, the proponents of giving a customer a choice while denying brokers and firms the same choice, ignore the interests of the consumer, being blinded by their desire for an advantage over their adversary.

For example, in the pending legislation that I referred to in an earlier post, Congress has premised the need for legislation on a supposed problem - forcing consumers to litigate in far away cities. Obviously the sponsors of the bill have no idea what is involved in securities arbitration, for those are held in a large city closest to where the customer lives. The customer does not travel to a far away city, the broker does.

Advantage for the customer? Of course it is, and Congress admits that is an advantage to the party who does not have to travel. But what happens when we abolish arbitration? The customer travels to the city where the broker-dealer is located, the exact evil that Congress is attempting to address. Although the NASD unilaterally, and without a rule amendment, altered the law of venue, in court, venue provisions are enforced. Customer agreements contain venue provisions and choice of law provisions that typically put the hearing in the broker-dealer's home state, using the law of that state. (Before someone screams about this provision, that is true in virtually every contract ever written, from automobile leases, to softwar leases, to computer purchase agreements, to employment contracts).

Even assuming the customer agreement did not contain a venue clause, traditional considerations for venue, used by the courts for decades, will result in the trial being held in the broker-dealer's city, not the customer's home town.

There is quite a bit more food for thought in the white paper, and it was heartening to see someone take the time and effort to document what those of us practicing securities arbitration have known for decades - arbitration is less expensive (by at least $25,000 per case), faster (by at least 40%) and equally "fair" however you define the term.

Proponents of the abolishment of arbitration often cry that customers have been forced to give up their right to a trial by jury. That is an interesting thought and an emotional battle cry. Unfortunately, it is meaningless, as less than 2% of all civil cases go to a trial. Less than 2%. One should not be heard to complain that he gave up something that he had absolutely no chance of ever receiving.

The paper examines all of these issues, in a well documented and well written discussion of the arbitration process.

One additional note for those of you who believe that the industry created mandatory arbitration, another false battle cry. The government created mandatory arbitration, by forcing brokers and brokerage firms to arbitrate disputes with their customers, at the demand of the customer. That was in 1972, long before there were pre-dispute arbitration clauses in wide spread use, and over a decade before Shearson vs. McMahon.

At the same time I won't object to the abolition of mandatory arbitration, so long as the mandatory part of the concept is removed for all parties - including the firms and brokers. If customers want to spend the time, and the money, litigating their claims in court, so be it. The benefit goes to the defendants, not the claimant. The party with more money always benefits in litigation. Always.

The other benefits are numerous - small cases will never be brought, because no one will be able to afford to bring those cases (even in arbitration, claimant's attorneys are reluctant to take cases where the damage is less than $100,000).

There is also the benefit of having case law to guide decisions, the right to appeal adverse decisions, the advantage of years rather than months, to pay an award, and on and on. In fact, is was all of these advantages that caused the government to force the industry to arbitrate disputes over 30 years ago. Not that much has changed in this regard, and the advantages remain.

So, abolish mandatory arbitration - for all parties.

FINRA Proposes to Ban Dispositve Motions in Arbitration

I have spend my entire career in the SRO arbitration forums, and have witnessed many improvements to the process, and some steps backwards, but this one has to be at the top of the list. Well, it is not the top - the top of the backwards steps was the NASD's decision to appoint one of the public arbitrators as the Chairperson, regardless of their qualifications. You have not lived until you have had a real estate broker, who has only seen a handful of arbitrations try to decide evidentiary objections.

FINRA's proposal (the link is in the headline) is to once again limit the power of their own arbitrators. Like they did with expungement, when they effectively told their own arbitrators that they could not be trusted to enter an expungement order, and that FINRA was going to ignore such orders, FINRA is doing it again.

FINRA is proposing to limit motions to dismiss in arbitration proceedings, and to limit them in such a way that there will be no motions to dismiss. Every respondent will be forced to go to a hearing on claims that have no legal basis to be heard at all.

Under FINRA's proposal applies in all cases where a party files a dispositive motion before a claimant finishes presenting its case. I presume that is FINRA's clever way of saying a prehearing motion to dismiss.

So, in the case of a prehearing motion to dismiss, an arbitration panel will not be permitted to dismiss a case unless one of three findings were made (1) the parties settled the dispute in writing; (2) there was "factual impossibility," meaning the party could not have been associated with the conduct at issue; or (3) the existing 6-year time limit on the submission of arbitration claims. The rule proposal also would require that arbitrators hold a hearing on such motions and that any decision to grant a motion to dismiss be unanimous, and be accompanied by a written explanation.

While I suppose that we should be thankful that FINRA is allowing its arbitrators to dismiss claims that have been settled, the limitation to "factual impossibility" and the 6 year eligibility rule forces dozens, if not hundreds, of cases to hearing that should not go to hearing because the claimaint could not possibly win.

I am not talking about motions for failure to state a claim, which probably do not belong in arbitration. But how about a claim, under New York law, for defamation on a U-5 when damages are the only relief sought? It is legally impossible for a claimant to prevail on such a claim, and FINRA is going to force the parties to a hearing?

A more important example - the running of the statute of limitations. While FINRA may not realize it in its rush to bend over backwards to appease the claimant's bar, there are many statutes of limitation that are shorter than 6 years. In fact MOST statutes of limitation are shorter than 6 years.

So, hypothetically, a customer brings a claim for violation of a wrap fee agreement, claiming that he was overcharged. He closed his account in 2002, and he files his claim in 2007. That case is within the 6 year eligibility rule, but the statute of limitations, which in most states is 4 years for a breach of contract, has run. State law BARS the claim. The Claimant cannot possibly win, yet FINRA is going to force the parties to arbitrate that dispute.

Or another case - two customers join together and sue to different brokerage firms in the same arbitration. A violation of the NASD's own rules on consolidation, and one of those claims must be dismissed, but there will be no way to dismiss that claim. Or two claimants joint together and sue a firm, but factually one of the claimants is simply mistaken in his facts. No dismissal of that claim either.

What are we going to do with the Claimants who think it is clever to name every executive in a brokerage firm as a respondent. When a claimant names Stan O'Neal in his churning case, the new rule will prohibit a motion to dismiss, since it is not "factually impossible" for Mr. O'Neal to have been liable for events that occurred at Merrill during his tenure as CEO - in fact, it is legally and factually possible. However, Mr. O'Neal has a near perfect defense to such a claim. FINRA is going to force him to a hearing? FINRA is not going to allow its arbitrators to make a decision regarding the possibility of Claimant proving a claim against Mr. O'Neal? How about when a claimant names every executive at a brokerage firm. We are not going to allow a panel to decide who goes and who stays? How about a churning case where the chief financial officer is named?

FINRA claims that it is proposing this new rule based on an allegation that "[i]n many instances dispositive motions were being used to needlessly delay arbitration hearings, which resulted in investors not getting cases heard on a timely basis and incurring extra costs," said Linda Fienberg, President of FINRA Dispute Resolution. "We believe the proposed revisions will curb any abuses and ensure that investors maintain the right to have their arbitration claims heard."

If I didn't have so much respect for Ms. Feinberg, I would think she was joking. I sincerely doubt that anything is being delayed because someone filed a motion to dismiss. If hearings are being delayed, the problem is in Ms. Feinberg's office. Remember, we are talking about motions filed before the close of Claimant's case, i.e., pre-hearing. Hearings are held 14 to 18 months after a statement of claim is filed. Motions to dismiss are typically filed on a schedule set by the arbitration panel, and are fully submitted months before any hearing is scheduled.

The filing of a motion to dismiss does not delay a hearing. FINRA's sometimes inability to schedule a hearing date for the motion is a problem however. I have been involved in cases where motions to dismiss were filed, and fully briefed, and FINRA Arbitration simply could not manage to schedule a date for oral argument. In fact, I have one such case right now where the parties have fully briefed the issues, and despite the passage of 4 weeks, no hearing has been held.

And on the topic of delays, why does it take FINRA months to schedule a prehearing conference? MONTHS. If we are concerned about delays, lets work on getting the arbitrator selection process started on time, arbitrators selected on time, and a prehearing conference held before the next two full moons appear.

Motions to dismiss are not causing delays in arbitration, they are causing frivolous and spurious claims to be dismissed. Since that is not good for the claimants who simply wish to name every person they can name, suddenly it is a problem?

If we are concerned about the delays in hearing a motion to dismiss, we might as well ban discovery motions - heck, they delay proceedings even longer (particularly when arbitration panels insist that a motion filing date of 30 days before a hearing is plenty of time to address the issues and get documents produced. But that is a rant for another day).

But with all due respect to Ms. Feinberg, I don't believe for a second that motions to dismiss are delaying arbitration hearings in any significant way, or in any significant number of cases. With a 14 to 18 month lead time from filing to hearing, there is plenty of time for a panel to hear and decide a motion to dismiss without delaying the hearing.

I will be urging the SEC to have Ms. Feinberg provide evidence of this alleged delay, and for her to demonstrate how many of the 4,000 cases are delayed because of a prehearing motion to dismiss. It will be interesting to see how many there are.

The reality is that the rule is being proposed to address alleged delays, frivolous motions and abusive motions. If that is the conduct that we are seeking to stop, then address that conduct. Assess costs against the party making such a motion. Assess attorneys fees against such a party. Or a truly novel concept - deny the motion.

Mukasey Coasts Thru Confirmation Hearings

Michael Mukasey, the President's nominee for Attorney General, testified at his confirmation hearings yesterday. According to press reports, it seems that he has struck the balance between law enforcement and civil liberties, although he did not comment on the government's controversial wire-tapping program.

I have the pleasure of appearing before Judge Mukasey when he was sitting in the United States District Court for the Southern District of New York, and found him to be a thoughtful and insightful jurist. While I was somewhat surprised that the President nominated him for the post, I was not surprised to learn that his confirmation hearings are going smoothly.

Hopefully, he can turn the Justice Department around, restore some of our lost constitutional rights, and get law enforcement moving in the right direction again.

Chipping Away at SRO Immunity

An interesting decision from the 11th Circuit is making its way into the press. Apparently an investor has decided to sue NASDAQ in an attempt to recover his losses in Worldcom.

I have not reviewed the complaint, but it appears that he has raised two basic claims - one that NASDAQ is liable to him because it continued to list Worldcom, and two, that NASDAQ's advertising was false and misleading, and caused him to buy Worldcom.

While the merits of those claims will be decided later, the interesting part of the caselore is the NASDAQ immunity issues. NASDAQ claimed that the immunity they enjoy for handling government-like regulatory duties should be extended to the claims over the ads. The 11th Circuit ruled that "governmental" immunity did not apply, since the ads did not serve a regulatory, adjudicatory or prosecutorial function.

While NASDAQ is not the NASD, or FINRA, and the decision is perhaps limited by its facts, the chipping away of absolute immunity for private entities acting as government regulators might cause some thought to be put into some of the more extreme regulatory actions.

Self-regulation a danger?

The spread of self-regulation among the
world’s financial exchanges presents dangers for investors because of
‘increased risk for conflicts and future crises’, according to an influential new study.

The findings signal concern that investors could suffer amid
the global rapid convergence of markets and consolidation of securities
exchanges.

Technorati Tags: securities, regulation, nasd, finra

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SEC Considers Changing Reg D

In a move that will have wide-spread implications for issuers seeking to raise capital through a private placement, the SEC is considering significant changes to Regulation D.

The proposals include a new exemption for offerings made to "large accredited investors" and to permit limited advertising to those investors; a clarification of the term "accredited investor"; and a shorter time frame for integration.

The release is 121 pages long, and the comment period ends October 9, 2008.

The SEC Sharpens its Investigative Focus

While everyone has issues with the SEC's policy decisions at one time or another, I believe most securities defense attorneys agree that the SEC Staff does a good job at its job....given its very high turnover and budget restraints.

However, a recurring criticism of the SEC has a whole is that while it is very good at closing the barn doors after the horses are long gone, it is not so good at understanding that the doors are unlocked and wide open.

The Commissioners and senior staff are undoubtedly aware of this. Under budget and under staffed, we can't expect the Staff to conduct enough audits at broker-dealers, public companies, mutual funds, investment advisers, and other registrants, to have a meaningful impact on discovering on going fraud. (Oh, and they want to add hedge funds to the already massive list?).

However, the SEC is focusing on enforcement. The SEC has announced that it has created four special "working groups" to sharpen its enforcement process and bring cases of suspected fraud more quickly and efficiently. The four groups are focuing on subprime issues, hedge funds, insider trading and option back-dating.

I am not quite sure what an investigative focus on hedge funds represents, but we have long suspected an increased focus on hedge funds through back door methods since the SEC's disasterous attempt to regulate hedge fund managers. Insider trading has always been a focus of the Staff, and one would have thought that all of the option backdating cases that could be brought have already been brought.

But subprime? There is an issue that needs investigation, and which will only increase in focus, as investors realize the drubbing they have taken in subprime related investments and start complaining to the regulators and filing arbitrations.